Rupee hits all-time low on mounting external finance pressures, rising US yields

By Nimesh Vora

MUMBAI, May 19 (Reuters) – The Indian rupee fell to an all-time low on Tuesday amid rising external pressures; The protracted Iran conflict has caused a sustained rise in oil prices, while also pushing up US Treasury bond yields.

The rupee fell to ‌96.44 per US dollar, surpassing the previous lifetime low of ‌96.3875 on Monday. The currency’s losses following the Iran war that broke out in late February have now reached 6%.

The combination of high crude oil prices and subdued capital inflows, supported by the protracted US-Iran impasse, is increasing India’s external imbalances and leaving the rupee vulnerable.

Economists expect India’s current account deficit to widen significantly in the current fiscal year. A potential hit to remittances from the Middle East and reduced portfolio flow expectations due to growing concerns about India’s growth outlook could increase external sector pressures.

Economists predict India’s balance of payments will have a deficit of $65 billion to $70 billion this year; This marks the third consecutive year of deficits and underscores persistent external sector pressures.

India “faces a two-pronged challenge to reduce the current account deficit and attract sustainable capital inflows,” HSBC said in a note.

“Continued distribution of foreign exchange market pressure between foreign exchange weakness (which may reduce the trade deficit over time) and foreign exchange reserve use will help.”

High oil prices are already fueling India’s external and inflation dynamics.

The merchandise trade deficit widened to $28.38 billion in April, largely due to crude oil imports rising to a six-month high.

At the same time, wholesale inflation in April reached its highest level in the last three and a half years, highlighting the pass-through of high energy costs.

Prime Minister Narendra Modi’s recent calls to save fuel and foreign exchange underscore the extent of the pressure on the economy.

USA’S INCREASE INCREASED THE PRESSURE

The recent rise in US treasury yields due to inflation concerns further complicates the outlook for the rupee. The 10-year U.S. bond yield climbed to a one-year high before easing on Tuesday as investors increasingly priced in the possibility of a Fed rate hike this year.

This will likely make it more difficult for India to attract the capital inflows needed to finance its current account deficit, analysts say.

(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala and Janane Venkatraman)